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June 01, 2011 at 08:00 PM
These are the major issues facing advisors in 2011: performing increased due diligence on investment products; adapting to a fluid regulatory environment; improving efficiency in the back office and directly with clients; finding alpha-producing investments at a time of slow economic growth and continued volatility in the markets; succession planning; deciding which business model—broker-dealer or RIA—to adopt; and providing holistic financial advice to clients on all their investments, not just those over which the advisor has control.
In each of those areas, Envestnet stands at the crossroads. Starting life as a turnkey asset management provider, the newly public company has built on its TAMP legacy, under the leadership of its founders—notably Jud Bergman—and Bill Crager to the point where it can provide a technology-based platform that allows advisors to address all those major issues in an efficient way. Its growth in revenue, advisors served and assets has been strong, but the company isn’t finished with its growth plans and in providing the partnership services that advisors need to serve clients better, to be compliant, and to find best-in-breed money managers now and in the future.
As proof of its focus on the future, look at the hires Envestnet has made in the run-up to its July 2010 IPO and since it went public. People like Mike Henkel, as co-head of Envestnet PMC, with a nonpareil research background from his days at Ibbotson. People like Jim Patrick, formerly of PIMCO Allianz who joined the company in 2009. People like Ron Fiske, formerly of Fidelity Institutional and Pershing Advisor Solutions, who signed up last year and manages relationships with custodians. People like Marion Asnes, the former editor in chief of Financial Planning magazine, also added to the executive team in 2010 as chief marketing officer. People like John Phoenix who formerly was CEO, of all things, of a Denver RIA firm. The additions strengthened the core of veterans like the aforementioned co-founders and notably Lori Hardwick, who runs Advisory Services. All of them are firm believers in the company’s approach and proud of its accomplishments so far, but Envestnet is not resting on its IPO laurels.
[Read more from Lori Hardwick about keeping customers happy.]
For advisors, finding a deep comfort level with the people running a company is a prerequisite to partnering with that company. The people at Envestnet know technology, they know investing, they know efficiency, and they know compliance. Most of all, they know advisors and understand the issues they face. Envestnet is a force to be reckoned with, but as a custodian- and broker-dealer-neutral firm, it’s not taking sides, though it’s certainly prepared for the future.
Where It Is, Where It’s Going
Bergman says Envestnet plans to organically grow its top line at 20%, growth that he suggests will be accelerated with “selected acquisitions” that will be either financially accretive and provide access to more advisors in the current channels the firm serves, or strategic acquisitions of application providers that add to or enhance functions on its platform that will be “value accretive.” Bergman says “We expect to do one or two” of those acquisitions “in the coming year.” One acquisition that might be a sign of Envestnet’s future acquisition plans took place last June, when the company acquired B-Ready Outsourcing of Landis, N.C., which has enhanced back-office data management and reporting services for Envestnet users of Schwab’s Portfolio Center portfolio management software.
The company has about $140 billion in total platform assets, and served more than 21,000 advisors on some part of its platform at year-end 2010, including more than 13,000 who have some degree of discretion over client assets, reports Crager.
Total assets on the Envestnet platform have grown from $82 billion at year-end 2007 to $140 billion at year-end 2010. AUM and assets under administration (AUA) have grown from $29 billion in 2007 to $63.7 billion in 2010. The company has increased its technology development expenses from $4.9 million in 2008 to $5.6 million in 2010. Growth is continuing in 2011. In first-quarter results announced May 5, Envestnet posted adjusted net income of $2.8 million on a 35% increase in revenues to $29.3 million compared to 2010’s first quarter. Revenues from AUM and AUA increased 42% compared to Q1 2010, to $23.3 million.
Accounts on the platform grew from 600,000 to slightly over 900,000 from 2007 to 2010, while advisors using Envestnet grew from 11,000 to 21,000. Those advisors are independent and regional broker-dealer reps and RIAs. While Envestnet has benefited from the move toward independence in the advisor space, it has also abetted that move through its Web-based platform that accommodates the needs of existing advisors and the requirements of brokers moving from a captive model.
Another trend Envestnet is enabling is the move toward a fiduciary standard for all advice givers. When founder and CEO Bergman, (left), says “We take our fiduciary role seriously,” he’s talking partly about the Envestnet PMC investment platform through which an advisor can find “a trusted partner to the high-net-worth client as a co-fiduciary.” Beyond voicing mere support for a fiduciary standard, Envestnet has incorporated a fiduciary approach to serving clients directly into an advisor’s workflow through the Fiduciary Oversight Notes, or FONs, tool on its platform. The FONs, which appear as small blue notes on the platform, can be attached to any one of a number of actions taken on the platform, including buy orders or client meeting notes.
[Read more about FONs from Envestnet's managing director of strategic partnerships, Ron Fiske.]
FONs can be added at the advisor’s discretion, or mandated by a broker-dealer depending on the action being taken. They then are archived, allowing a compliance department at a BD, or a visiting examiner from a regulator, to view them on demand. The content for the FONs was developed in partnership with the securities law firm of Sutherland, and end clients can get a report showing “what choices were made” about their accounts, says Crager, “and why.”
That feature encapsulates Envestnet’s approach: Not simply providing tools for and access to portfolio management and reporting and compliance, but incorporating those tools into the advisor’s workflow. That yields efficiency, provides scalability and fosters growth in an advisor’s practice, but also allows for better service to end clients.
Envestnet was founded in 1999 as a wealth management technology platform serving RIAs, then in 2001 acquired TAMP provider Portfolio Management Consultants, now Envestnet PMC, providing access to separate account portfolios, tools, analysis and reporting. The independent broker-dealer world then took notice. “The investment world was changing,” recalls Crager of the environment in which the company was founded, and Envestnet’s strategy then, and now for that matter, was to explore how to provide the same technology and products to independent advisors that the wirehouses had. 
“In many ways, we’ve gone beyond” what the wirehouses offer, argues Crager, (left). “We’ve evolved to where we’re empowering and enabling advisors,” says Bergman to both manage the wealth of high-net-worth clients, and “to win new business” from wirehouses.
While proud of its TAMP legacy, Crager says that approach provided due diligence and a technology platform in a “contained” way, that since then “Envestnet has opened up.” Crager says the firm is “neutral on product” as well as being “neutral on how those products are delivered.”
“Many broker-dealers think of us as a TAMP,” Hardwick says, “but they don’t realize” that Envestnet may well “be the solution to their hybrid advisor problem.”
Custodian Neutral; Product Neutral
One recent sign of that neutrality on the separately managed account front is the announcement in late April that Envestnet added an absolute return portfolio, called Crystal Strategy I, to its SMA platform from Brinker Capital, a putative competitor.
John Coyne, (left), Brinker Capital’s president, says that Brinker saw the Envestnet deal as an opportunity “to expand beyond traditional distribution and to meet the needs of the broker-dealers” using Envestnet’s platform. It’s a changed world, said Coyne, noting that Brinker is in talks to put the strategy on the Pershing Lockwood platform as well, though he also said that “a few years ago, if you said those three names [Envestnet, Brinker, Lockwood; all competitors in the SMA space] in the same sentence, people would think you were crazy.” Envestnet, says Coyne, has done “a terrific job of creating one of the most dynamic platforms for SMAs.”
Another example of how Envestnet’s offerings are appealing to RIAs who want more efficiency in providing investment solutions for clients came in April. National Advisors Trust Co. (NATCO), the RIA cooperative trust company, signed a deal to provide its advisors with access to Envestnet UMA to create customized portfolio models for clients. In return, Envestnet advisors will gain access to NATCO’s trust and custody platform.
Advisors on the platform express satisfaction with Envestnet as well. Bill Bestgen, of Bay Financial Associates in Waltham, Mass., is a Commonwealth Financial Network rep who says he takes full advantage of the IBD’s association with Envestnet to screen SMA managers before subjecting it to his own rigorous due diligence process. “Envestnet has a minimum as low as $100,000,” he says. “So a smaller $1 million account or a $1.5 million account can still get allocated across all asset classes properly.”
[Read why Marion Asnes chose Envestnet over any other company in the industry.]
Hardwick, (left), notes that brokers leaving wirehouses can retain their clients’ accounts at those wirehouses when using the Envestnet platform and still view those accounts. That is what made it possible for Envestnet to introduce last November a UMH—a unified managed household offering, though in May, Fiserv announced it would roll out a version of a UMH later this year.
say which of those managers they like, and why,” allowing those analysts, he said, to do “real analytical work.” (Henkel, (left),is a regular commentator on 